environmental management and product innovation: the
TRANSCRIPT
Environmental management and product innovation: The moderating role of the
dynamic capability of small manufacturing firms
Abstract
Given the overwhelming concerns on environmental issues, our study attempts to investigate
the important role of environmental management practice in the context of product exploration
and product exploitation. Additionally, we examine the moderating effect of transformative
capability and absorptive capability on the relationship between environmental management
and product exploration and exploitation. Based on a survey of 106 managerial-level
employees from small manufacturing firms in the United Kingdom (UK), this study found that
environmental management practice has a positive direct effect on product exploitation and
product exploration. The study also found that (1) transformative capability positively
influences the relationship between environmental management and product exploration; (2)
absorptive capability negatively influences the relationship between environmental
management and product exploitation. From this study, we offer novel insights that extend the
existing literature concerning the outcomes of environmental management within the context
of product exploration and product exploitation.
Keyword: environmental management, sustainability, small firms, dynamic capability,
exploration, exploitation.
1. Introduction
This study aims to extend the understanding about the relationship between environmental
management and product innovation in the context of small manufacturing firms. While there
have been sporadic efforts to address these issues, environmental management and product
innovation have their own research streams and the knowledge in both have been developed
separately (De Medeiros et al., 2014). Though some studies (e.g. Maletič et al., 2016; 2018)
have recently attempted to create a linkage between these two streams of research, studies have
tended to remain at a conceptual level; hence the need for more empirical evidence to unify the
current understanding from studies focusing on environmental management and product
innovation.
As a response to the research gap on the role of environmental management, this study
addresses the following research questions: How does environmental management impact on
product innovation? And, what effect does dynamic capability have on the relationship between
practising environmental management and product innovation? These research questions are
derived from the inherent conundrum associated with the need to respond to the current
awareness concerning sustainability, at the same time as overcoming a challenge to introduce
environmental management as a part of the product development process (Aragón-Correa and
Sharma, 2003; Triguero et al., 2013). More specifically, this study is a response to the recent
call (e.g. Boiral et al., 2018; Maletič et al., 2016; 2018) for studying the practice of
environmental management in a small firm context. The implementation of environmental
management is a challenge for small firms as they have limited access to resources and are
bounded to their local context (Bromiley and Rau, 2016). Considering the limitations on small
firms, this study argues that the success of introducing environmental management into product
innovation is contingent on the capability to dynamically integrate, build and reconfigure
internal and external resources to address rapidly changing environments (Aboelmaged and
Hashem, 2019; Ferreras-Méndez et al., 2016; Gebauer et al., 2012; Teece et al., 1997).
Using a survey conducted among 106 managerial-level employees from small manufacturing
firms in the UK, this study intends to make several contributions. First, it provides insights into
the practice of environmental management in the context of small manufacturing firms. Small
firms are important and considered to be the cornerstone of sustainable development
(Blackman, 2006), representing around ninety-nine percent of all enterprises (Van Hoof and
Lyon, 2013). While previous literature has investigated the practice of large firms, only a few
have focused on small manufacturing firms, creating a paucity in understanding about the
interaction among environmental management, innovation and the dynamic capability of small
firms. Second, following recent calls (e.g. Boiral et al., 2018; Maletič et al., 2016; 2018;
Ogbeibu et al., 2019; Ambec and Lanoie, 2008), this study examines the impact of
environmental management on small firms’ innovation activities. To be more specific, we
advance current and existing works by focusing on the role of dynamic capability in moderating
the relationship between environmental management and product innovation. This effort is an
extension of the emerging debate in the literature on environmental management and
innovation initiated by several scholars such as Maletič et al. (2016; 2018) and Ogbeibu et al.
(2019). Third, this study helps advance both practice and research. From a practice perspective,
it provides insights for small firm managers about environmental management practice,
producing competitive advantage, and developing environmentally-friendly products. From a
research perspective, it seeks to advance the theoretical linkages between environmental
management and innovation management. The study also provides underpinnings for further
exploration regarding the role of dynamic capability in supporting the efforts of small firms in
addressing sustainability and environmental issues.
The paper is organised as follows. We start by discussing the definition and theoretical
background. Next, we hypothesize about the impact of environmental management on product
innovation and the role of dynamic capability in moderating the relationship between the two.
The following section is concerned with methodological aspects of the empirical study,
including data collection, measurement issues and method of analysis. Descriptive results and
modelling results are presented and discussed next. The paper closes with a conclusion,
implications and limitations.
2. Theoretical background
2.1 Defining environmental management and product innovation
The cleaner production literature shows that environmental management is a structured and
systematic approach for managing and measuring organisational environmental impacts (Xie
et al., 2016b). In this study, environmental management practices are defined as actions taken
by organizations, including formal standards and common practices, aimed at reducing the
negative impact on the natural environment. The activities involve multiple functional units
across the firm, namely logistics, operations, marketing and services. In the past, environmental
management has naturally been applied during production processes (Prajogo et al., 2014;
Albino et al., 2012), but it has been extended to other processes such as marketing and new
product development. It involves the creation of new routines as well as re-alignment with
existing operational routines aimed at reducing the impact on the natural environment (Diwekar
and Shastri, 2010). The benefits from implementing environmental management have been
discussed in previous studies and include new business opportunities (Montabon et al., 2007),
an increase in financial performance (O’Donohue and Torugsa, 2016) and a decrease in
negative environmental impacts (Ateş et al., 2012; Molina-Azorín et al., 2009).
Due to the rise in popularity of environmental management, more businesses are aware of
environmental consequences during the product development process (Chen, 2011); consumers
are more prone to purchase products that consider the environment and sustainability
(Makower, 2009) and are more willing to pay a premium price in supporting sustainable efforts
(Chen and Chang, 2012). While the common arguments suggest that firms need to create
products with core attributes that satisfy customer’s needs, there has been a rise in demand for
products with eco-friendly benefits (Zhang et al., 2015) and especially those which have a less
negative impact on the environment (Beylot et al., 2019). This situation has encouraged firms
to integrate an environmental philosophy with product innovation, the aim being to prevent
production waste while increasing efficiencies.
As there has been increased attention toward assimilating environmental management into
innovation activity, especially during new product development, this study responds to that call
by examining two types of product innovation activities, namely product exploration and
product exploitation (Chan et al., 2016; Severo et al., 2017; Voss et al., 2008). Product
exploration is defined as the extent to which firms introduce new products to meet emerging
customers’ demand, meet new market potential or promote the introduction of new technology
in products or services. In contrast Product exploitation is the extent to which firms emphasize
incremental innovation of products and designs to meet the needs of existing customers (Jansen
et al., 2006). The effort is to expand, refine or improve the existing offering. While early studies
have argued that balancing these two activities is difficult, further studies have identified the
existence of ambidextrous organisations that can perform both (Kammerlander et al., 2015).
However, since the sustainability issues are becoming mainstream, it is important for firms to
integrate environmental management practices with both innovation activities (Pujari et al.,
2003).
2.2 Environmental management, product innovation and dynamic capability
For many small manufacturing firms, capability in linking existing skills and resources to meet
external pressures, such as sustainability and environmental awareness, is a key success in
supporting growth through innovation (Dunlap et al., 2016). Compared to large firms, small
firms experience limited resources which may reduce their ability to introduce environmental
management into innovation activities. However, such firms are known to be more flexible and
agile in transforming and reconfiguring resources. As a result, small firms’ capabilities are
considered to be the catalyst for practising environmental management. This is in line with the
contingency perspective that believes that small firms’ actions or strategies need to fit within
their context – whether it is the external environment, organisational structure, or precondition
factors (Mokhtar et al., 2016). In this case, the implementation of environmental management
into innovation activities should be aligned with small firms’ capability in order to maximise
the outcomes. The capability to dynamically integrate, build and reconfigure internal and
external resources and skills to address a rapidly changing environment is critical (Winter,
2003; Eisenhardt and Martin, 2000; Teece et al., 1997). Given that applying environmental
management and innovation involves a high degree of change and uncertainty, dynamic
capabilities can be treated as a moderator for ensuring the positive impact of environmental
management on product innovation activities.
The notion of dynamic capabilities was first introduced by Teece et al. (1997) to describe
competitive advantage in dynamically changing markets. It was initially defined as the capacity
of an organization to purposefully create, extend, or modify its resource base (Teece, 2007). In
understanding the green entrepreneurial orientation, Jiang et al. (2018) described dynamic
capability as a mechanism to exploit new ideas and encourage innovativeness. As discussed in
Horbach et al. (2012) and Aldieri et al. (2019), innovation as a part of environmental
management can be identified as: (a) market pull factors where the market demands a ‘green’
product and process, (b) technology push drivers where firms have explored new technology
to make a product or process ‘greener’, and (c) regulation to meet certain requirements for
environmental performance. All those factors require firms to dynamically develop their
capability. This includes the capability to acquire, develop and reconfigure resources or
knowledge from internal and external sources. In line with the above argument, this study
considers that small firms’ capability is referred to as transformative and absorptive.
Transformative capability refers to the degree of a firm’s ability to constantly redefine a
portfolio of product or service opportunities based on knowledge endogenous to the firm. The
term was initiated from Garud and Nayyar (1994) (as transformative capacity) while referring
to the exploitation of knowledge generated within an organisation to create technological
advances, new business opportunities, and increase competitive advantages. Absorptive
capability refers to the degree of a firm’s ability to recognize the value of new, external
information, assimilate it, and apply it to commercial ends (Cohen and Levinthal, 1990). It
involves the assimilation process of new external knowledge with the firm’s existing internal
knowledge (Wang et al., 2015). In short, transformative capability is defined as a firm’s
capability to utilise internal resources and knowledge while absorptive capability is the
capability of firms to absorb new external resources and knowledge. Figure 1 shows the
hypothetical model of this study.
Figure 1. Research framework and hypothetical relationships
Environmental management
practice
Dynamic capability
Transformative capability
Absorptive capability
Product innovation
Product exploration
Product exploitation
2.3 Hypothesis development
2.3.1 The impact of environmental management practice on product innovation
The first hypothesis concerns the influence of environmental management on product
exploration and product exploitation. Several studies (e.g. Maletič et al., 2018; Chen and
Chang, 2013) have argued that environmental management practice supports product
exploration. Recent findings have shown that performing exploration can be used as a predictor
of innovation performance especially in competitive environments (Maletič et al., 2018). One
of the reasons is that exploration is driven by desires to discover something new (Yalcinkaya
et al., 2007); and exploration in environmental management has a long-term objective of
producing new products that have the least negative impact on the environment (De Medeiros
et al., 2014). Thus, environmental management drives small firms to realign their strategy to
explore new products while at the same time focusing on emerging new customers and market
needs (Molina-Castillo et al., 2011; Molina-Azorín et al., 2009). Another reason relates to the
reduction of daily operating costs as a result of the implementation of environmental
management. In addition, environmental management practices usually force firms to explore
new areas of research and technology. This sustainability issue has attracted more firms to
develop new products with “green” features as it is becoming a powerful competitive weapon
in the market (Chen, 2011). For instance, many car manufacturers have advanced technology
by producing car engines with cleaner combustions and better fuel economy. Based on these
arguments, we posit as follows:
H1a. Environment management practice has a positive impact on product exploration
activities.
Moreover, environmental management may encourage innovation through product
exploitation activities. With product exploitation, firms perform innovation activities through
incremental improvements such as the introduction of product variants featuring improvements
and market repositioning (Levinthal and March, 1993; Stone, 2006) while trying to reduce
usage in materials, water and energy use (Maletič et al., 2016). Performing exploitation does
not only strengthen a small firm’s position in the market but is also more likely to reduce the
cost of operation so lower prices can be offered to consumers (Prajogo, 2016). As the objective
is to consider the reduction of natural resources, water, energy, materials and other practices
that minimises the negative impact on the environment (Potts, 2010), among the possible
solutions are improved products that offer sustainable features such as having recycled
components, less packaging, being manufactured in an energy-conserved way, and being less
detrimental to human health (Ikram et al., 2019). When small firms implement environmental
management, they potentially optimise the production process and therefore stimulate
exploitation activities (Shin et al., 2008). Hence, product exploitation can be an option for small
firms to achieve their environmental goals. In other words, small firms practising
environmental management are more likely to perform incremental innovation and improve
their existing product(s). Based on the above arguments, we suggest that a higher level of
environmental management practices would result in more encouragement to perform product
exploitation. Therefore, the hypothesis is constructed as follows:
H1b. Environmental management practice has a positive impact on product
exploitation activities.
2.3.2 Transformative capability and its moderating role in environmental management
and product innovation practices
This hypothesis argues that transformative capability is critical for the implementation of
environmental management on small firm product innovation. Small firms should develop
transformative capability so they can adapt their business according to the market’s need and
expectation such as the increasing awareness of sustainability and the environment (Wang et
al., 2015). Transformative capability is an extension of dynamic capability and it explains the
process of utilising internal resources to meet external demand. The transforming aspect of
dynamic capabilities is needed most obviously for addressing new opportunities such as new
products produced with stronger environmental awareness (Dangelico et al., 2017).
Transformative capability encourages the use of internal knowledge to trigger the development
of new knowledge while trying to optimise existing knowledge (Pandza and Holt, 2007). A
study from Nath and Ramanathan (2016) shows that the ability to integrate internal knowledge
is critical to support environmental management practice and to produce strong environmental
performance. Several studies (e.g. Albino et al., 2012; Dibrell et al., 2011) found a critical
condition for transformative capability is the presence of commitment and strong collaboration
among units within a firm. This is so due to time saving advantages, for example not needing
to “break the ice”, and understanding of the social cognition of each unit. In the context of
product exploration, those conditions will help firms to utilise internal resources and
knowledge as a response to environmental changes. These activities often focus on exploring
new opportunities such as the development of new technology or the opening of a new market
as a result of new trends and perspectives to preserve the environment and increase
sustainability. In line with the above arguments, we propose the hypothesis as stated below:
H2a. The interaction between transformative capability and environmental
management practice produces a positive impact towards product exploration
activities.
Similarly, transformative capability helps small firms in exploiting their current product or
market. An example of a firm’s transformative capability is the integration of different
functional units within an organisation which can produce internal knowledge integration that
is important for firms engaging in green practices (Dibrell et al., 2011). One reason for this is
that integration of different functional units brings a different composition and level of
heterogeneity (Bercovitz and Feldman, 2011). During product exploitation, small firms
perform activities to increase efficiency of the production process while introducing
environmental management practices. During the process, the capability to reconfigure existing
resources and knowledge is critical to deliver the innovation within environmental management
practice. In summary, combining internal resources and knowledge with understanding of the
current market means small firms will be able to respond to the increased awareness of
environmental performance through product exploitation. Thus, the following hypothesis is
considered:
H2b. The interaction between transformative capability and environmental
management practice produces a positive impact towards product exploitation
activities.
2.3.3 Absorptive capability and its moderation role in environmental management and
product innovation practices
This study argues that small firms’ absorptive capability helps to strengthen the implementation
of environmental management on innovation activities (Wang and Ahmed, 2007). Absorptive
capability appears to be one of the important determinants of a firm’s capability to absorb new
external knowledge and to apply it to create commercial goals (Açikgöz et al., 2016). Studies
have suggested that absorptive capability can assist businesses to capitalise on external sources
of innovation (West and Bogers, 2014; Harrington and Guimaraes, 2005). In order to respond
to the needs of the market, small firms respond by introducing new products or improvement
(e.g. upgrade, update) to existing products that create less environmental damage (e.g. avoiding
production wastage) (De Medeiros et al., 2014; O’Cass et al., 2014).
Firms with a high level of absorptive capability are potentially more likely to assist
environmental management in succeeding with product exploration. With respect to green
practices, as firms increase their effort to explore new products with sustainable features, they
usually engage with new buyers and regulatory authorities, and gain new external knowledge
which provides advantages to explore new product opportunities (Xie et al., 2016a). The
essence of product exploration by “experimentation with new alternatives” is prone to be
complex and involve uncertain returns (Zhang et al., 2015; March, 1991). Absorptive capability
is known to enhance speed and frequency of innovation and knowledge that it produces (Lane
et al., 2006). The resulting knowledge databases and unique competitive edges helps to serve
the firm in exploring innovation in new product ventures that support environmental practices
(Pacheco et al., 2018). This element is needed in the product exploration strategy since first-
movers tend to have more opportunity. Using the advantage of early access to knowledge, firms
can plan their exploration strategy more efficiently. Thus, we posit the hypothesis as follows:
H3a. Interaction between absorptive capability and environmental management
practice produces a positive impact on product exploration activities.
While the essence of product exploration is “experimentation with new alternatives” (Zhang et
al., 2015; March, 1991), product exploitation aims to develop a more efficient use of
organizational resources and reduce development time and costs (Jansen et al., 2006). For
product exploitation, absorptive capacity provides knowledge about integrating environmental
management practices into existing products or processes. Firms engaging in exploitation
opportunities usually interact with outsiders (Foss et al., 2013) to obtain a more accurate and
complete assessment of what the markets need to avoid unwanted and unimportant features
(Carbonell et al., 2009). It provides the advantage of an expanded range of resources beyond
a firm’s internal capacity to create solutions for customer needs (Salonen and Jaakkola, 2015).
This kind of external collaboration is therefore important for firms practicing environmental
management in order to have a better understanding of other competitors’ practices and current
market needs, which provides a better insight into the appropriate refinement of the existing
product. As absorptive capability helps firms to develop and maintain external networks, firms
with a high level of absorptive capability are more likely to absorb information and knowledge
about environmental management and quickly build their capability (Xie et al., 2016a).
Building on the above discussion, the following hypothesis is posited:
H3b. Interaction between absorptive capability and environmental management
practice produces a positive impact on product exploitation activities.
3. Research Methods
3.1 Research Setting and sample
The empirical research was conducted based on a survey of UK small manufacturing firms.
We defined small manufacturing firms as having an annual turnover of less than £25 million
and/or having fewer than 250 employees (Department for Business Innovation & Skills, 2012).
The FAME (Financial Analysis Made Easy) database was used to retrieve the list of
manufacturers in the UK (Story et al. 2015; Deutz et al. 2013). We approached respondents
from various backgrounds ranging from environmental managers to firm CEOs. In cases where
no specific position was appointed to manage a firm’s environmental activity, we asked for
suitable respondents at managerial levels that would have access to the information that we
required.
Before conducting the survey, we conducted a pilot interview among random business owners
or top management representatives of small manufacturing firms. In total, we conducted pilot
interviews with seven firms. The respondents were asked to complete the online questionnaire
and to indicate any ambiguous or unclear phrasing of items. Besides answering the survey,
respondents were also asked to provide suggestions to improve it. After completing the pilot
test, we improved the questions and produced the final questionnaire. We employed simple
random sampling where 2,767 small manufacturing firms were contacted by phone between
August 2016 and December 2016. To ensure respondents were comfortable answering the
survey questions, we guaranteed anonymity (López-Gamero and Molina-Azorín, 2016). The
firms that agreed to participate in the research were given a special link created specifically for
that particular firm. Follow-up phone calls were made two weeks after sending the survey.
Finally, 106 firms completed the survey giving a response rate of 5.6%. We benchmarked our
response rate with previous studies from the same domain and found ours comparable to similar
survey-based research (e.g. Gualandris and Kalchschmidt, 2016; Jabbour et al., 2014; Mitra
and Datta, 2014). The demographical profile of the firm sample is presented in Table 1.
Table 1. Firm Profiles
Demographics Number of
respondents
%
Type of business
Chemical / pharmaceutical
Electrical / medical equipment / communication equipment
Paper / textile / printing / leather
Food
Furniture / wood / rubber / plastic product
Metal / machine / steel
Other (s)
Multiple industries
4
13
12
8
10
22
7
30
3.8
12.3
11.3
7.5
9.4
20.8
6.6
28.3
Age of firm
Less than 10 years
11-25 years
26-50 years
51-100 years
More than 101 years
4
20
47
24
11
3.8
18.9
44.3
22.6
10.4
Number of employees
Less than 25
26-50
51-100
101-250
13
23
37
33
12.3
21.7
34.9
33.1
Sales
Less than £1,000,000
£1,000,001 – 5,000,000
£5,000,001-10,000,000
£10,000,001-25,000,000
3
21
26
49
3
21.2
26.3
49.5
We performed some analysis regarding the collected date. The completed surveys were
compared with the non-completed surveys with respect to the dependent variable to test the
existence of mean difference. The results from the paired sample t-test showed no significant
statistical difference between both categories at the significance level of 0.05, indicating
absence of non-response bias (Wang and Ahmed, 2007). We acknowledge that common
method bias is a source of threat since our survey was responded to by a single respondent from
each firm. As suggested by Podsakoff and Organ (1986), Harman’s single factor test was
employed to detect common method bias. The test was conducted via principle component
analysis with varimax rotation. Four factors (eigenvalue>1) emerged totalling 83.28% of
variance explained with no one factor accounting for more than 50% of the variance (Mattila
and Enz, 2002).
3.2 Measurement and validation of constructs
Using a 7-point Likert scale ranging from 1 for “strongly disagree” to 7 for “strongly agree”,
all items in the questionnaire were measured from a firm-level perspective and were treated as
reflective indices. The complete items can be found in the appendix.
Product exploration (α=.88) was measured using four items from Jansen et al. (2006),
capturing the extent to which new products are introduced to meet market demands.
Product exploitation (α=.93) is the extent to which firms emphasize incremental innovation
towards existing products and was measured using four items adapted from Jansen et al. (2006).
Environmental management (α=.89) was examined by employing a five-item scale of
environmental management adapted from Porter’s (1985) value chain model. We asked
respondents to rate the development of environmental management at their organisation in five
areas: inbound logistics, outbound logistics, operations, marketing and sales, and services. We
treated this construct as a formative measure.
Transformative capability (α=.95) was measured with an existing 5-item scale from Gibson
and Birkinshaw (2004) and Schilke (2014). Respondents were asked to rate their firm’s ability
to strategically adapt opportunities and knowledge within the firm.
Absorptive capability (α=.95) used a four-scale measure adapted from García-Morales et al.
(2008). Respondents were asked to rate their firm’s ability to recognise new external
opportunities and knowledge to undertake internal transformation.
Several control variables were selected based on previous literature and the perception that they
would affect the firm’s environmental management and innovation activities. These were the
firm’s total years of operation, number of employees and annual sales. These variables were
normalised using natural logarithm alleviate univariate non-normalities and account for non-
linear effects (Feng et al., 2010; Swamidass and Kotha, 1998).
4. Findings
4.1 Descriptive statistics and factor analysis
The study employed factor analysis to reduce the items. To measure the reliability, the Kaiser-
Meyer-Olkin Test was performed. The result show that the sampling adequacy is 0.873
indicating reliability of the model. The constructs with eigenvalues of more than 1 represented
83.28% of variance explained. The Cronbach alpha had values higher than 0.7
(minimum=0.844) showing internal consistency among the constructs (Nunnally and
Bernstein, 1994). The factor loading of items within the constructs had a minimum value of
0.666. Higher loading scores for the items is important and have a greater influence to present
a factor (Hair et al., 2006). Moreover, confirmatory factor analysis was employed to establish
convergent validity and discriminant validity (Fornell and Larcker, 1981). For convergent
validity, this study followed the work of Mitra and Datta (2014) where average variance
extracted (AVE) should be at least 0.5 and composite reliability (CR) is above 0.7. The model
was an overall fit where none of the items from the constructs needed to be removed. The
minimum AVE was 0.666 and 0.887 for CR. For discriminant validity, following Fornell and
Larcker (1981), an inter-construct correlation was conducted (Table 2). The result shows that
the square root of AVE for each construct exceeded the correlation value between the two.
Upon assessing the goodness-of-fit for our model, we confirmed that the model displayed an
overall fit (X2=1.77; GFI=.82; AGFI=.95; RMSEA=.09). Table 3 shows the construct and
items representing the whole research model along with the item loadings, AVE and CR.
Table 2. Descriptive statistics and correlation coefficients
Mean SD 1 2 3 4 5 6
Product exploration 5.13 0.13 1
Product exploitation 5.52 1.16 .57** 1
Environmental
management
20.12 7.61 .30** .32** 1
Absorptive capability 4.94 1.29 .32** .29** .17 1
Transformative
capability
4.33 1.52 .36** .35** .58** .53** 1
Years of operation 51.04 40.06 .08 -.01 .13 .14 .07 1
N= 106; *p<0.05; **p<0.01
Table 3. Summary of measurement scales
Items Mean SD Item
loading
Composite
Reliability
AVE
Transformative capability
T1
T2
T3
T4
T5
4.29
4.36
4.43
4.41
4.16
1.68
1.65
1.69
1.70
1.60
0.84
0.88
0.92
0.89
0.81
0.95
0.80
Absorptive capability
A1
A2
A3
A4
5.00
4.99
4.97
4.78
1.43
1.33
1.31
1.43
0.90
0.90
0.90
0.84
0.95 0.84
Product exploration
P1
P2
P3
P4
5.30
5.24
5.18
4.79
1.44
1.67
1.61
1.68
0.64
0.85
0.89
0.81
0.89 0.68
Product exploitation
R1
R2
R3
R4
Environmental management
E1
E2
E3
E4
E5
5.39
5.66
5.53
5.52
3.67
4.85
3.95
3.76
3.89
1.28
1.23
1.32
1.25
1.80
1.78
1.85
1.83
1.83
0.83
0.87
0.88
0.86
0.89
0.77
0.84
0.83
0.86
0.93
0.88
0.78
0.67
Note: SD, standard deviation.
4.2 Analysis
In this study, a hierarchical regression method was employed (Ferreras-Méndez et al., 2016).
To detect any multicollinearity issues, two indicators were used, namely correlation between
variables and the variance inflation factor (VIF). The highest correlation was 0.57 while the
results show no VIF’s higher than 2.14. Both results show that the analysis has no issue with
multicollinearity. Hierarchical regressions were conducted in five steps. In the first step, the
control variables were introduced, and the main effects were examined in the second step. The
remaining steps were used to investigate the moderation effect. The overall results of the
regression analysis are displayed in Table 4 which shows that control variables were not
significant across the models. Hence, the number of years firms had been operating, number of
employees in the firm, and firm accumulated sales has no effect on product exploitation and
product exploration.
With regard to the effect of environmental management on product exploration and product
exploitation, the analysis shows a mixed result. Models 3, 5, 7, 8 and 10 show a positive and
significant relationship (P<0.05), while models 2, 4 and 9 show no significant relationship
between environmental management and product exploration/exploitation. This supports
hypothesis 1a and hypothesis 1b. On the one hand, the finding supports the role of
environmental management on product exploration. As Prajogo et al. (2014) argue,
environmental management involves a production process that relates to all aspects of product
manufacturing, usage, handling, logistics and waste management, the most probable outcome
is the creation of new products or refinement of existing products that abide by the
environmental concerns at every step of the value chain. On the other hand, the findings also
support the influence of environmental management on product exploitation. The reason is that
product exploitation offers the quickest and easiest way to support environmental initiatives
(Maletič et al., 2014). As practicing such a strategy may jeopardise the profitability, firms try
to introduce environmental concerns through improvement of an existing product (Pujari et al.,
2003). In this case, product exploitation may occur through minimising by-product waste and
increasing the use of recycled material on some aspects of the existing product (Lenox et al.,
2000). Overall, the findings support the recent argument from Wang et al. (2019) that a firm’s
environmental culture and practice are the main elements of green innovation.
The next analysis dealt with the interaction between the variables of environmental
management and dynamic capabilities. To check whether transformative capability has a
moderating effect on the connection between environmental management and product
exploration, we observe the difference of an adjusted R2 for the model without moderating
effects (model 2) compared to the adjusted R2 of the model with moderating effects (models 3
and 5). The table shows higher explanatory power in models 3 and 5 compared to model 2.
Besides that, the moderating effect of transformative capability is significant and positive in
both models 3 and 5 proving that the interaction between environmental management and
transformative capability is significant. The finding confirms hypothesis 2a that transformative
capability strengthens the impact of environmental management on product exploration. This
finding is in agreement with prior research that supports the positive impact of internal
knowledge acquisition and utilisation on firm performance (Wang et al., 2015) and
innovativeness (Jiang et al., 2018) . In line with the concept of dynamic capability, having
transformative capability promotes the combination of internal resources in the development
of new products (Teece, 2016). Unfortunately, the findings failed to confirm any support for
the argument that transformative capability moderates the relationship between environmental
management and product exploitation. The results were insignificant based on models 8 and
10 for such a relationship. Before adding the interaction effect (model 7), the adjusted R2 was
13.9% but after including the interaction effect (model 10), the explanatory power dropped to
13.1%. Thus, hypothesis 2b was not supported, as the result suggests transformative capability
has no moderating effect on the connection between environmental management and product
exploitation. One explanation might be due to the nature of product exploitation itself that is
associated with an incremental innovation and a well-defined return (Yang et al., 2014). The
process might not require integration with existing knowledge to proceed such a strategy as
compared to a product exploration strategy which involves higher uncertainty due to its more
radical innovation (Maijanen and Virta, 2017). While this result in insignificant, it enhances
the dynamic capability literature to argue that not all aspects of dynamic capability are able to
influence firm innovation strategy.
The next analysis concerned the interaction effect of environmental management and
absorptive capability. The findings (models 3 and 4) suggest that the interaction effect does not
influence product exploration. Therefore, we could not support Hypothesis 3a. This result
seems to indicate that, among small manufacturing firms, resources and knowledge gained
from transformative capability may play a more important role in determining a firm’s
environmental management practice with regard to product exploration than knowledge gained
from absorptive capability. Interestingly, the finding (models 8 and 9) suggests that the
interaction between environmental management and absorptive capability has a negative
impact on product exploitation (P<0.05), which supports hypothesis 3b. One explanation could
be that collaborating with external organisations to absorb new knowledge and resources
exposes risks of technology leakage and also incurs a higher cost due to the collaboration
process (Chen et al., 2011). Though dynamic capabilities are viewed as an enabler towards the
success of organisations during changing circumstances (Helfat and Winter, 2011), having the
capacity to value external knowledge and ability to leverage it (i.e. absorptive capability)
(Ferreras-Méndez et al., 2016) may not help to complement processes of product refinement
and instead potentially disturb the current focus of the organisation.
Figure 2 illustrates the role of dynamic capability in moderating the relationship between
environmental management and product innovation using a simple slope analysis (Aiken et al.,
1991). In the figure, the dependent variables are placed on the vertical axis while the
independent variable is shown along the horizontal axis. Panel A in figure 2 depicts the
interaction between transformative capability and environmental management on product
exploration. When transformative capability is available to firms, environmental management
has a positive effect on product exploration. Moreover, it also reveals that the impact of
environmental management on product exploration decreases for firms with a low level of
transformative capability. Panel B in figure 2 visualises the pattern of interaction between
environmental management and absorptive capacity. The findings failed to identify a positive
interaction between environmental management and product exploitation. In other words,
when a firm’s absorptive capability is low, its practice of environmental management leads to
a stronger positive effect on product exploitation compared to when a firm’s absorptive
capability is high.
Table 4 Result of hierarchical regression
N = 106. Standard errors are in parenthesis; *p<0.05; **p<0.01; ***p<0.001
Product Exploration Product Exploitation
Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Model 10
Main effects
Environmental
Management (EM)
0.04 (0.01) 0.05* (0.02) 0.03 (0.01) 0.05* (0.01) 0.04* (0.01) 0.03* (0.02) 0.03 (0.02) 0.05* (0.02)
Transformative
capability (TC)
0.12 (0.11) 0.25* (0.13) 0.10 (0.11) 0.23t (0.13) 0.08 (0.10) 0.23* (0.11) 0.13 (0.10) 0.09 (0.11)
Absorptive capability
(AC)
0.23 (0.12) 0.10 (0.12) 0.25 (0.12) 0.11 (0.12) 0.19 (0.10) 0.06 (0.11) 0.15 (0.10) 0.18 (0.11)
Interaction effects
EM x TC 0.04** (0.00) 0.04** (0.01) 0.02t (0.01) 0.00 (0.00)
EM x AC -0.01 (0.01) 0.01 (0.01) -
0.04**
(0.01) -
0.02*
(0.01)
Control
Firm age 0.00 (0.0) 0.00 (0.00) 0.00 (0.00) 0.00 (0.00) 0.00 (0.00) 0.00 (0.00) -0.00 (0.00) -0.00 (0.00) -
0.00
(0.00) -0.00 (0.00)
Firm size
0.01 (0.02) -
0.01
(0.01) 0.00 (0.01) 0.01 (0.02) 0.00 (0.02) 0.00 (0.01) 0.01 (0.00) 0.01 (0.00) 0.01 (0.01) 0.00 (0.00)
Sales 0.16 (0.09) 0.18 (0.07) 0.07 (0.09) 0.15 (0.10) 0.17 (0.08) 0.18 (0.08) 0.11 (0.10) 0.09 (0.08) 0.16 (0.07) 0.15 (0.09)
Adjusted R2 -0.00 0.13 0.18 0.14 0.20 -0.01 0.15 0.21 0.19 0.14
p-value 0.40 0.01 0.00 0.00 0.00 0.94 0.00 0.00 0.00 0.00
Figure 2. Plotting Significant Two-way Interactions
Panel A: Product Exploration = environmental management x transformative capability
Panel A: Product Exploration = environmental management x absorptive capability
1
1.5
2
2.5
3
3.5
4
4.5
5
Low level of environmental
management practice
High level of environmental
management practice
Exp
lora
tio
n
Low level of
transformative
capability
High level of
transformative
capability
1
1.5
2
2.5
3
3.5
4
4.5
5
Low level of environmental
management practice
High level of environmental
management practice
Exp
loit
ati
on
Low level of
transformative
capability
High level of
transformative
capability
5. Conclusion and discussion
Business has been seeing a critical shift in that sustainability and environmental management
are now top priorities on many firms’ agenda with the intention of maintaining a cleaner
production process. Practices aimed at conserving the environment have penetrated at a deeper
level of organisations, from production and operational to innovation management, supporting
pollution prevention and waste (Aragón-Correa and Sharma, 2003; Triguero et al., 2013).
Following the current trend in the literature, this study’s aim was to examine the role of
environmental management and dynamic capability on product exploration and exploitation in
the context of small manufacturing firms. The summary of findings is shown in Table 5. This
study found that environmental management practice has a positive impact on product
exploration and product exploitation (H1a and H1b) which is in line with recent findings from
the literature on environmental management and sustainability (e.g. Papagiannakis et al., 2019;
Masri and Jaaron, 2017; De Medeiros et al., 2014; Azman et al., 2013). As there is increasing
pressure to consider environment and sustainability aspects in business, small manufacturing
firms are now keen to adapt their products to create cleaner production and more efficient use
of resources such as energy, water and human capital. This would therefore result in an
improved product or a new product that consumes fewer materials, uses sustainable materials,
reduces waste and energy, and decreases the inflow of raw material inputs and water (Ribeiro
Massote and Moura Santi, 2013).
Moreover, the study also found that dynamic capabilities matter and their role has been
confirmed in numerous recent studies (e.g. Jiang et al., 2018; Zhou et al., 2018). Furthermore,
it allows firms to leverage available resources and knowledge to update and exploit product
innovation in response to changing business environments (Qiu et al., 2020). For product
exploration, the alignment between environmental management and transformative capability
produces a significant and positive impact on product exploration while environmental
management and absorptive capability have a significant but negative impact on product
exploitation. Generally, most of the literature suggests dynamic capabilities are a strong
predictor for environmental management practices among firms (Arend, 2014). However, in
this study, we find that different types of dynamic capability (transformative or absorptive
capability) can have different impacts depending on a firm’s external or internal conditions.
Table 5. Summary of Findings
Hypothesis Proposed
Effects
Hypothesis
Supported?
H1a: EM → Product exploration + Yes*
H1b: EM → Product exploitation
H2a: EM*Transformative capability → Product exploration
H2b: EM*Transformative capability → Product exploitation
H3a: EM*Absorptive capability → Product exploration
H3b: EM*Absorptive capability → Product exploitation
+
+
+
+
+
Yes*
Yes**
No
No
No**
*p<0.05; **p<0.01
These findings warrant further discussion. The interaction between environmental management
and transformative capability (H2a) produces a significant and positive effect on product
exploration while the same interaction has a positive but insignificant effect on product
exploitation (H2b). Apparently, the capability to utilise internal resources is more effective
during exploration than during exploitation activities. While on average, our samples showed
that most firms are engaged with the product exploitation process (x̄=5.52), firms engaging in
environmental management might not be dependent on internal sources of knowledge or
information to aid them with the exploitation strategy. On the other hand, firms combine their
internal knowledge, expertise and resources to explore opportunities in the product or market
as a result of implementing environmental management.
Furthermore, our results failed to confirm the role of absorptive capability (H3a) as a moderator
for an environmental management-product exploration relationship. In most cases, absorptive
capability enables firms to adapt to changes in strategy to remain competitive (Winter, 2003).
However, in the context of implementing environmental management during product
exploration, internal resources and knowledge might be sufficient to assist firms during the
product development process. Another explanation is because the small manufacturing firms
in our sample come from diverse sectors where context and domestic spillover effect of
environmental management might have different impacts. For instance, knowledge about
environmental innovation in the chemical industry cannot be applied in the textile industry.
This finding supports previous studies such as from Braun et al. (2010) that found the
importance of absorptive capacity in capturing the domestic spillover effect in the case of wind
and solar technology. In their study, it was evident that domestic spillovers have more
significant impacts than international spillovers. In other word, knowledge about applying
environmental management in product innovation requires contextual understanding.
Lastly, the study found that absorptive capability negatively moderates the relationship
between environmental management and product exploitation (H3b). This means that having
a high level of absorptive capability together with practising environmental management will
result in lower engagement with product exploitation. The possible explanation is because the
engagement with external networks forces firms to focus more on product exploration rather
than product exploitation. In this case, the potential returns as a result of developing a new
product or new market is higher than exploiting a current product or market. This finding is in
line with earlier studies (e.g. Arbolino et al., 2018) that while environmental management in
product innovation may produce a positive effect on the environment, it can weaken firms’
productivity performance. Pacheco et al. (2018) who looked into the moderating role of
absorptive capability towards organisational factors on green innovation performance, finds
this capability leads to new green products but not refinement of existing products. Moreover,
the negative effect of absorptive capability might also be caused by some level of negative
spillovers. In this case, the success of implementing environmental management during
product innovation in one sector is associated with a decline in another (Truelove et al., 2014).
It might be the case that firms have introduced environmental management practices in their
product innovation process as a result of copying others’ strategy without fully understanding
the impact on their product, market and organisation.
5.1 Contributions of the study
The findings of this study suggest several theoretical implications. First, the findings add to the
emerging stream of literature on environmental management. Previous studies focused on
linking environmental management to general issues of product development (e.g. Sihvonen
and Partanen, 2016) without specifying the type of activity during the product development
process. This study extends Maletič et al's (2016; 2018) work in studying the impact of
environmental management on exploration and exploitation activities. Our study contributes to
the development of knowledge in this subject by investigating the role of dynamic capability
towards environmental management and innovation management (product exploration and
product exploitation).
Second, we focus on a different perspective on the measurement of environmental
management. Unlike previous work (e.g. Burgos‐Jiménez et al., 2013), this study defines
environmental management as Porter's (1985) value chain. The framework developed in this
study can be adapted to other contexts or industries. This functional-based measure was
established to view environmental management from another viewpoint besides activity-
oriented measures. By reflecting on environmental management from a different functional
level, this study looks to overcome the common problem of latent variables as having non-
observable items (Vidal-Salazar et al., 2012) which contributes towards having a more precise
measurement of environmental management.
Third, this study adds more understanding regarding the role of dynamic capabilities. Limited
empirical research has ventured into environmental management, especially among small
manufacturing firms. We followed the work of Wang et al. (2015) that identified dynamic
capability across firms (through a reflective construct approach). The importance of dynamic
capability has been addressed over the past few years where several researchers have
highlighted that specific knowledge capabilities are crucial to enhancing a firm’s
environmental practice since they connect to internal and external drivers (Melander, 2018;
Hashim et al., 2015) The findings of this study show the unique characteristic of absorptive
and transformative capability that has different impacts on the relationship between
environmental management and innovation management. Thus, while agreeing to the positive
potential of firm resources, there are some attributes that may lead the implemented strategy to
reduced efficiency and effectiveness (Barney, 1991). To some extent, this study provides
empirical evidence of the impact of spillovers in the context of environmental management and
innovation. As recent studies (e.g. Aldieri et al., 2019; Truelove et al., 2014) have started to
open the debate regarding the positive and negative impact of spillovers, this study shows that
in adapting and practicing environmental management, especially in the context of product
innovation, the role of locality and sectoral dimension should be considered. In this case, firms
need to develop capability not only in acquiring and integrating internal and external
knowledge but also adapting it to their own context.
In addition to their theoretical contribution, the findings offer insights and practical
recommendations. First, the results suggest that environmental management plays an important
role in understanding product innovation among small manufacturing firms. Moreover, they
further explain why environmental management should be prioritised among the selection of
firm strategies. Second, the negative association between environmental management,
absorptive capability and product exploitation reported in this study signals that small
manufacturing firms wishing to pursue superior performance in product exploration through
environmental management need to avoid engagement with absorptive capabilities. This
finding is in line with the ideas from Maijanen and Virta (2017) that associate operational
capability with incremental innovations and dynamic capability with radical innovations.
5.2 Limitation and recommendation for further study
The limitations of this study offer avenues for future research. First, the sample was limited
only to manufacturers categorised as small manufacturing firms which limits the
generalisability of the findings. Therefore, future work could focus on medium or large firms
to compare with this study. In addition, we included all sectors within the manufacturing
industry, such as metal, chemical, food, etc., and so neglected the possibility that different
sectors might have their own approach leading to different findings. Further study can examine
the practice of environmental management in each sector. Besides that, studies that specify the
sector type would be useful since there are numerous sectors in the manufacturing industry
with various characteristics. Second, we tested the hypothesis by means of a questionnaire thus
providing cross-sectional data, which is limited to evaluating variables at different stages of
firm development. The older firms may accumulate knowledge and experience to adapt to
environmental management practice better than young firms. Therefore, future research could
be longitudinal and designed to investigate environmental management, dynamic and product
innovation at firms of different ages. Third, we gathered data using perception-based measures
where surveys were answered by a single respondent representing the views of the sampled
firm. We appreciate there could be potential bias and/or inaccurate reporting in answering the
questionnaire. Future research could consider using secondary data as a replacement for the
existing measures to counter this issue. Fourth, not all of our significant results scored a great
statistical significance of less than 0.001. Since research on statistical significance has evolved,
our concern towards lack of reproducibility for claims of new discoveries has grown, signalling
that a lower threshold for statistical significance is needed. Following Benjamin et al. (2018),
we recommend that hypothesis 3b which has a statistical significance lower than 0.005 should
be supported with further evidence based on future research.
Appendix
Appendix 1 Scale Items Used in Survey
Scale Items
Environmental management
To what extent has your firm engaged in voluntary environmental activities with:
Inbound logistics
Operations
Outbound logistics
Marketing and sales
Services
Absorptive capability
How did your firm adapt to newly acquired knowledge from outside the firm?
Our firm had the necessary skills to implement newly acquired knowledge
Our firm had the competences to transform the newly acquired knowledge
Our firm had the competences to use the newly acquired knowledge
Our firm had a clear division of roles and responsibilities for acquiring new knowledge
Transformative capability
How did your firm adapt knowledge gained from within the firm?
Our firm encouraged its personnel to challenge outmoded practices
Our firm evolved rapidly in response to shifts in our business priorities
Our firm was flexible enough to allow us to respond quickly to changes in our markets
Our firm established its identity in order to be competitive in the open market
Our firm sought to determine areas of internal synergy
Product Exploration
Our firm has accepted demands that go beyond existing products and services
Our firm has invented new products and services
Our firm has experimented with new products and services in our local market
Our firm has commercialized products and services that were completely new to our
organization
Product Exploitation
Our firm has frequently refined the provision of existing products and services
Our firm has regularly implemented small adaptations to existing products and services
Our firm has introduced improved iterations of existing products and services for our local
market
Our firm has improved the efficiency of our provision of products and services
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